Bitcoin Flashcards
Intermediary Based Model
Centralized Classical model
The (trust-worthy) clearing house decides whether the transaction partners have paid the transaction and
respectively have received the mone.
Intermediary Based Model
decentralized model
Double spending problem –> The network timestamps transactions by collecting them into a chain forming a
record that cannot be changed
Ledger: The blockchain is a chain of digital signatures
Everybody in the peer-to-peer network is aware of all
transactions and can judge whether the transactions are
valid or not
Anonymity: All transactions and blocks are hashed
Sha256
Under SHA256 the output string has 64 hexa-decimal
digits, i.e. 256 binary digits
SHA 256 -64 Hexadecimal DigitsEqual 256 Bit
What is proof of work?
Proof of Work is a system in which network participants (called miners) compete to solve a complex mathematical puzzle. The first one to solve it gets to:
Propose the next block in the blockchain,
Receive a block reward (newly minted coins + transaction fees),
And have their solution verified by others.
The puzzle must be computationally expensive to solve but easy to verify. This asymmetry is crucial.
What is Base58 encoding in Bitcoin?
Used for legacy addresses (starting with “1” or “3”)
Encodes binary using 58 alphanumeric characters, avoiding confusing ones (like 0, O, I, l)
Applied via Base58Check encoding with checksum
What is Base32 (Bech32) encoding in Bitcoin?
Used in native SegWit addresses (starting with “bc1”)
Encodes using 32 lowercase characters for QR-friendliness and error correction
More efficient and robust than Base58
Ether Block
Etherium Prood of Stake
In Ethereum’s Proof of Stake (PoS) era (post-merge, 2022), blocks are produced every 12 seconds on average.
The confirmation time refers to how long it took from the previous block being finalized until this block was added to the chain.
It’s known because:
Each block stores the timestamp of when it was produced.
The time difference between adjacent blocks tells us how long confirmation took.
Oldest Analog Blockchain
Haber and Stornetta (1991), Journal of Cryptology,
realized that a newspaper could serve as a public ledger
Every week, the time-stamping service Surety took all the
hash values and boiled them down into a hexadecimal
number
Published an up-to-date hash value in an ad section of
The New York Times every week since 1995
Almost impossible for anyone—including Surety—to
backdate timestamps or validate electronic records that
were not exact copies of the original
Operational Principles of a Blockhain as Public, Decentralized Ledger?
What is a nonce?
The nonce is a random number that miners change repeatedly until the hash meets a specific difficulty condition—usually a certain number of leading zeros.
As the number of required leading zeros increases, the difficulty and time to solve the hash increases exponentially.
This mimics the mining process in Bitcoin. Miners search for a nonce that, when hashed with the block’s data, produces a hash below a given target (i.e., starts with enough zeros).
This work ensures that block creation takes time and effort, deterring manipulation.
PoW Puzzle?
Miners must find a nonce that produces a block hash with 19 leading zeros (Bitcoin’s actual difficulty varies, but this is illustrative).
This can require millions or billions of tries, depending on the difficulty.
The process ensures fairness and security by making it expensive to forge or spam the network.
Crypto Energy Consumption
What caused Ethereum’s energy consumption to drop after 2022?
Ethereum switched from Proof of Work to Proof of Stake, eliminating the need for mining and drastically reducing energy use.
Three Objectives of PoW (Consensus Mechanism)?
Achieve agreement:
All nodes trust the latest version of the chain.
Prevent double spending:
By reviewing every transaction, no one can spend the same coin twice.
Incentivize self-regulation:
Rewards are given to miners who follow the rules; cheating costs time and energy
Proof-of-Work is a Consensus Mechanism
Consensus Mechanism:
A set of rules that ensures all nodes in a decentralized network agree on the same state of the blockchain.
Why Consensus Matters:
In decentralized systems, there’s no central authority. So we need a way to:
Agree on transaction history.
Prevent fraud like double-spending.
Encourage honesty via economic incentives.
What does Bitcoin use?
Bitcoin uses Proof-of-Work:
Miners compete to solve cryptographic puzzles.
The first to solve gets to add the next block to the chain.
The more computing power a miner uses, the higher their chances.
Proof-of-Stake is a Consensus Mechanism
Why PoS?
PoW consumes massive amounts of energy. Ethereum transitioned to PoS to reduce its environmental footprint.
How PoS Works:
Validators stake (lock) some of their cryptocurrency.
The network randomly selects a validator to propose the next block.
More stake = higher chance of being chosen.
Validators check transactions and sign them if valid.
PoS Validators
To become a validator, you must:
Run a node and
Lock up a minimum amount of ETH (e.g., 32 ETH for Ethereum).
To avoid wealth centralization, randomness is added to the selection.
No nonce or energy-intensive mining is required.
Fraud avoidance
Bitcoin’s defense mechanism against fraud (especially double-spending) is based on mathematical probability and the fact that honest nodes have more cumulative mining power than attackers.
Bitcoin adds ~6 blocks per hour → 144 per day
Each block contains 2,000 to 4,000 transactions, totaling 300,000+ daily
If an attacker wants to double-spend, they must create a longer chain than the honest one
But the further behind they are, the lower their chance of catching up
From Nakamoto (2008), showing how many block confirmations (z) are required to make the probability of attack success < 0.1% for a given q/p ratio.
Bitcoins Mining Block Reward
New Bitcoin is issued as a reward to miners for finding a block.
Maximum supply is 21 million BTC.
Initial reward (2009): 50 BTC per block
Reward halves every 210,000 blocks (~every 4 years):
50 → 25 → 12.5 → 6.25 → … until it reaches ~0
Eventually, no new BTC will be issued, and miners will rely only on transaction fees
Economic Implications of Bitcoin Reward
Economic Implications:
Predictability: Users know the exact issuance schedule in advance
Scarcity: Fixed cap prevents inflation
Monetary Policy Alternative: Bitcoin follows a pre-coded rule, unlike fiat currencies, which can be adjusted at will
ETH Staking?
More ETH staked = Lower reward rate, assuming constant issuance.
ETH price and staking growth are not always directly correlated.
Reward rates reflect network demand and participation, making PoS adaptive and market-driven.
Rewards Drops as more ETH is staked — reward dilution due to larger pool of validators.
